Tom Essaye Interviewed with TD Ameritrade Network on November 20, 2019
Tom Essaye interviewed with Oliver Renick from TD Ameritrade, discussing Bonds vs Equities, trade war, yield curve, reflation and more…Click here to watch the full interview.
Tag Archive for: Bonds
Posts
Is the Tariff Delay Bullish?
Today’s Report is attached as a PDF.
What’s in Today’s Report:
- Why Isn’t the Tariff Delay Causing a Bigger Rally?
- Bond Market Update: Not Confirming 3000 in the S&P 500
Futures are marginally higher ahead of the ECB decision and following a short tariff delay by President Trump.
Trump announced that the October 1 tariff increases (25% to 30% on 250 bln of imports) will be delayed till October 15th as a gesture of “goodwill.”
Economic data was again soft as German Industrial Production dropped –0.4% vs. (E) -0.1%, continuing the trend of disappointing EU manufacturing data.
Today the key event is the ECB Meeting. The decision is at 7:45 a.m. and the Press Conference will be held at 8:30 a.m. For the ECB to meet expectations we need to see 1) A rate cut, 2) More QE and 3) A “Tiered” deposit system. Outside of the ECB we also get two important economic reports, CPI (E: 0.1%) and Jobless Claims (E: 215K) and they could move markets if they are surprises (especially is CPI runs hot).
Tom Essaye Quoted in CNBC on August 7, 2019
“Although gold futures remain near-term overbought, momentum is decidedly higher. Fundamentally, the sharp downtrends in bond yields…” said Tom Essaye, founder of the Sevens Report, in a note.
Why Stocks Have Rallied
What’s in Today’s Report:
- Why Stocks Have Rallied (FOMO)
- An Important Gap Between Stocks and Bonds
- EIA Analysis and Oil Market Update
Futures are slightly lower following a quiet night as markets digest more mixed economic data following the big three day rally.
Chinese economic data was mixed as Industrial Production missed estimates (5.3% vs. (E) 5.5%) while Fixed Asset Investment slightly beat and Retail Sales met expectations.
Geo-politically it was a quiet night as there were no updates to U.S./China trade.
Today focus will be on economic data via the Jobless Claims (E: 225K), Import Export Prices (E: 0.3%, 0.2%) and New Home Sales (E: 620K), as well as testimony before Congress by Treasury Secretary Mnuchin. Finally, there’s a GE guidance update later this morning, and if that’s particularly soft, that could hit stocks.
Rotation to Value
What’s in Today’s Report:
- More Evidence of the Rotation to Value
US futures are lower again this morning and most overseas markets declined overnight thanks to a continued rise in bond yields and concerns about global economic growth.
The IMF reduced global growth expectations for 2018 from 3.9% to 3.7% citing the escalating trade tensions between the US and China as a potentially significant headwind.
The NFIB Small Business Optimism Index eased to 107.9 vs. (E) 108.0 last month, but remains near a record high.
With the NFIB already out, there are no additional economic reports in the US today but there are two Fed speakers to watch, one shortly after the open: Evans (10:00 a.m. ET) and one later this evening: Williams (9:15 p.m.ET).
That will leave investor focus on the pace of rising bond yields and tech weakness. And unless we see some moderation in the bond rout and some stabilization in tech, it will be hard for stocks to move meaningfully higher today.
Yield Breakout (Threat to Stocks?)
What’s in Today’s Report:
- What Higher Yields Mean for Stocks
- Jobs Report Preview
Futures are moderately lower following hawkish commentary by Fed Chair Powell and ahead of a critical speech on China by VP Pence.
Fed Chair Powell said in a Q&A after the bell that the Fed is a “long way” from neutral rates and may have to go “past” neutral. The comments further pressured bonds overnight and extended the rise in global bond yields.
Politically, VP Pence will deliver a very critical policy speech on China that goes beyond economic criticism, and the concern is the speech will make a trade deal even more difficult to achieve.
Today focus will be on bond yields (does the surge in yields/dollar continue?) as well as the Pence speech on China (just how critical will it be?). Economically, there are two reports, Jobless Claims (E: 213K) and Factory Orders (E: 2.1%) and one Fed speaker, Quarles (8:15 a.m. ET), but none of that should move markets.
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Yellen and Draghi Speech Preview, August 25, 2017
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Both Fed Chair Yellen and ECB President Draghi will speak at the conference today, and while neither is expected to say anything market moving, there are always surprises, so we want to preview their remarks briefly.
Yellen’s Speech: 10:00 A.M. EST
Key question: Will Yellen give us any color on whether we get a rate hike in December?
Likely Answer: (withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).
What’s Expected: I’d give it about an 80% probability that Yellen does not even mention monetary policy
and instead just speaks broadly about the Fed’s role in helping ensure financial stability.
Wild Card to Watch: If there’s a risk of a surprise here, it’s for a “hawkish” surprise. Yellen could tie in the idea that in order to ensure future financial stability, the Fed needs to continue to remove accommodation and get interest rates back to normal levels.
Again, I think it’s unlikely she’d use this opportunity to discuss policy (unlike Bernanke, she’s never used Jackson Hole as a forum to discuss policy). Still, there is a chance (20% if my other probability is 80%).
If she does surprise markets, though, look for a textbook (and potentially intense) “hawkish” market response: Dollar and bond yields up (maybe big), stocks down, commodities and gold down.
Draghi Speech: 3:00 P.M. EST
Key Question: Will Draghi forcefully hint at a tapering announcement in September?
Likely Answer: (withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).
What’s Expected: Nothing specific. Draghi is not expected to speak or reference policy, mainly because the ECB meeting is less than three weeks away.
Wildcard to Watch: Commentary on the euro. While Draghi likely won’t say anything about expected policy, he might comment on the strength in the euro. It’s widely thought that the surging euro (up 10% vs. the dollar this year) would cause the ECB to be “dovish” and potentially delay tapering.
But, Draghi has pushed back on this notion recently, saying that the euro appreciation is the result of a better economy and rising inflation (hence virtuous).
If he reiterates those comments, or downplays the impact of a rising euro, that will be “hawkish” and the euro and German bond yields (and likely US Treasury yields) will rise, while the dollar will fall. This outcome would likely be positive for US stocks (on dollar weakness).
Bottom Line
In all likelihood, Jackson Hole should be a non-event, as it’s simply too close to the September ECB Meeting (Sept. 7) or the September Fed meeting (Sept. 20).
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FOMC Meeting Takeaways, August 17, 2017
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The FOMC minutes resulted in a “dovish” reaction in currencies and bonds, but in reality they didn’t reveal anything new.
Takeaway
The two big takeaways from Wednesday’s FOMC were 1) The Fed is united in reducing the balance sheet in September (which will be the start of the removal of additional accommodation) and 2) The Fed is divided on whether to hike rates in December because of low inflation. Neither of those takeaways should be surprising to anyone who has been paying attention.
The former (that the Fed is committed to reducing its balance sheet) was reaffirmed by the minutes yesterday, and while the market seems to be ignoring this event, I do want to remind everyone that the Fed will be reducing its Treasury holdings for the first time in a decade. That will, over time, have a “tightening” effect on the economy (although admittedly not at first).
The latter was where the market generated it’s “dovish” interpretation of the Fed minutes, but in reality the fact that “some” Fed members want to not hike rates again this year shouldn’t be a surprise. Bullard, Kashkari, Mester and others have voiced caution about further rate hikes in the past few weeks due to low inflation.
Conversely, Dudley, Williams and others have stressed very low unemployment and still-loosening financial conditions as reasons to continue with gradual rate increases. Otherwise, they risk getting behind a sudden upshot in inflation that forces them to raise rates very quickly.
Point being, we know there is this divide, and it will be resolved in the coming months based on inflation data. If inflation data bottoms and heads higher, they’ll hike rates in December. If it doesn’t, they probably won’t. That’s no different than it was Wednesday at noon.
From a market standpoint, the reaction was “dovish” as the dollar and bond yields dropped, and stocks rallied modestly. But, yesterday’s FOMC minutes should not be enough to elicit a material rally in stocks, nor should it be enough to push the dollar or bond yields to recent 2017 lows.
About the only notable takeaway from the minutes is that it’s likely anecdotally bullish for the “Stagnation” portfolio…(withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).
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What Does “Reflation” Actually Mean?, July 7, 2017
What Does “Reflation” Actually Mean?
One of the reasons I started the Sevens Report more than five years ago was because I hated the overuse of jargon by analysts and commentators. Frankly, markets and economics are not particularly complicated topics. There are a lot of variables involved, so getting the future right is difficult. However, understanding market dynamics and economic conditions is actually mostly common sense, because markets and economies are just the sum of collective actions by people. And, since people generally act in their own best interests, it’s not too difficult to understand markets and economics once you get past the jargon.
To that point, I’ve found myself using the terms “reflation” and “cyclical” entirely too much lately. That’s jargon, and I want to make sure that everyone knows exactly what I mean when I say “reflation trade” or “cyclical outperformance.”
So, what is Reflation?
Reflation is simply the idea that economic growth is going to accelerate in the future. To understand why we use the term reflation, think of the economy as a soccer ball. The ball is full of air when we have consistent 3% GDP growth. But, fallout from the financial crisis has put GDP growth around 2% for nearly a decade. So, the soccer ball (i.e. the economy) is deflated.
However, if we see economic acceleration back to consistent 3% growth, the ball (i.e. the economy) has been “reflated.” So, any economic news that implies better growth is termed “reflation.”
And, since reflation is just the expectation of an accelerating economy, people (i.e. investors and the market) react to that expectation. That reaction, typically, is comprised of:
1) Selling bonds (so higher rates) because in an accelerating economy central banks hike rates and inflation rises, both of which are negative for bonds.
2) They allocate investment capital to sectors of the economy that are more reactive to better economic growth.
These sectors are called cyclicals, because their profitability rises and falls with economic growth (like a cycle). Banks (better economy=more demand for money), industrials (better economy=capital investment in projects), small caps (better economy=rising tide for products and more availability of capital), and consumer discretionary (better economy=more spending money) all are cyclical sectors.
Companies in those sectors usually make more money when the economy is getting better, and the anticipation of that attracts capital at the expense of bonds and “non-cyclical” sectors such as utilities, consumer staples, healthcare, and, increasingly, super-cap tech.
Up until June, the non-cyclicals outperformed because there was no evidence of higher rates or better growth. But in June central banks sent a shot of confidence into the markets, and since then, in anticipation of that economic acceleration, cyclical sectors have outperformed. And, if today’s jobs report is strong, beyond any short term “Taper Tantrum 2.0” that’s likely a trend that will continue, especially given the trend change in bonds.
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When Will the Decline in Bond Yields Matter?, June 27, 2017
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For three months, we and other macro analysts have been warning that the bond market, via falling yields and a flattening yield curve, was sending a worrisome signal about future economic growth and inflation. And, that falling bond yields would act as a headwind on stocks.
Over that three months, the S&P 500 has moved steadily higher.
When will this chart matter? The S&P 500 (bar chart) has been diverging from yields (green line chart) for three-plus months. At some point, that gap must close.
Now, given that, it might seem like falling bonds yields don’t matter to stocks. However, decades of experience in this business combined with listening to experienced analysts and traders tells me that bond yields always matter to stocks… it’s just a question of “when” they matter.
Regarding when, most of us are working on a medium/longer-term time frame (i.e. quarters and years), so getting the bigger market signals right is more important than outperforming over a few weeks.
To that point, if bond yields do not reverse in the coming weeks/months, then I am quite sure that over the medium/longer term the stock market is in for a potentially significant pullback. Avoiding that pullback will be the key to multi-year outperformance.
So, the really important question is: “When will low bond yields matter?”
I believe the answer is: When investors realize bond yields are warning about a slowing economy, not lower inflation.
Right now, stock bulls are saying the drop in Treasury yields is just due to declining inflation—not because of potential slower economic growth.
Specifically, they’re pointing to statistical measures of inflation such as the CPI, PCE and the Price Deflator in GDP. Those measures of inflation are falling, which usu-ally means deflation (which is bad for stocks).
But, the bulls aren’t as concerned about falling statistical inflation because, in their view, inflation has changed. Specifically, there is a growing school of thought that in a technology-dominated world, the old inflation statistics (CPI/PCE/Price Deflator) no longer capture true inflation in the economy.
For instance, those inflation statistics are currently being driven down by 1) Lower oil, 2) The Amazon effect, where retail margins are relentless slashed, and 3) General technology making most everyday items cheaper and more efficient.
However, those price declines aren’t bad for the economy, and they don’t reflect the lack of consumer demand that usually accompanies falling prices. Technology and margin compression is making these prices fall, not an unwillingness of consumers to spend.
Meanwhile, asset and other forms of inflation are rising quickly. Over the past few years, home prices are up; rents are up, car prices are up, airfares are up, health insurance is up, tuition is up, the stock market is up and the bond market is up. So, the prices of all the things we “need” are up, but the prices of discretionary items (HD TVs, laptops, tablets, dishwashers, appliances) are down. Since CPI measures consumer goods heavily, inflation statistics are subdued.
Based on this logic, many investors aren’t sweating the decline in bond yields, because they believe, for now, that it’s just reflecting the decline in statistical inflation and not a future slowing of actual economic growth.
The key will be to recognize when investors begin to believe low bond yields reflect slower economic growth. That will be the time to get seriously defensive in asset allocations. Yet as Monday showed, with the market ignoring the soft Durable Goods report, we’re not there yet. But if this data doesn’t turn around, we will get there. Unfortunately, we don’t believe it’s different this time and if bond yields don’t start rising in the near term, then stocks will eventually suffer, like they’ve done virtually every time we’ve seen this type of stock/bond discrepancy.
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